Today, only a small proportion of members are using the many tools made available by sponsors to help with investing decisions; education sessions are weakly attended and the general level of basic investing literacy remains quite low across large segments of the member base.
Finally, and most disturbingly, more than one third of members are completely disengaged from the process, having made no active investment choice at all. The retirement savings of these people have flowed to “default” investments. These are typically low-risk cash or high bond content funds that are in most cases unsuitable as long-term investments for members but at least cover the sponsor’s perceived risk in having to select an investment option on the member’s behalf.
Against this backdrop, it seems clear that giving plan members access to the same investment products used by sophisticated defined benefit investment committees and supplying only some basic instruction in their use has failed to produce the desired results. Too many plan members are poorly invested to meet their liabilities; too many plan members are not invested at all.
IS THERE A BETTER WAY?
Investment managers can and should offer packaged products that leave more of the complex investment decisions in the hands of investment managers and greatly simplify the decisions for DC investors. This trend has already become apparent in the growing popularity of asset allocation funds, which offer prepackaged balanced portfolios geared to risk and linked to a simple questionnaire.
The next generation of these offerings is already upon us with “matrix” or “time to maturity” funds geared to age and expected time to retirement. In both cases, the goal is to offer a simple investment choice to members aimed at their needs, rather than attempt to make every DC plan member a skilled investment manager.
And just over the horizon lies the world of absolute return investment products. These are funds tuned not to market benchmarks, but to achieving steady positive absolute returns over a long period of time at a given level of risk regardless of market conditions. As the typical DC plan member needs a return of 6% to 8% over long periods to attain their goals, these may yet prove to be the ultimate answer to providing unadventurous, but highly-effective, DC fund options.
Finally, it is absolute strategies that holds the promise of “smart defaults”—an investment providing both a minimum acceptable level of return above inflation and a low level of risk. This would be a dramatic win for both worried plan sponsors and the many plan members currently sitting in the default option.
Did we get it all wrong so far? Perhaps. But there is still time to get it all very, very right.
Kevin Martino, executive director of UBS Global Asset Management’s client service group in Toronto. Kevin.Martino@ubs.com
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